The fund has risen 14% over the quarter, versus a return of 7.9% for the All Share index, and a rise of 10.6% for the Mid/Small Cap Index.

There are a number of old-time favourites of the fund where the market has finally appreciated the underlying value of the companies involved. Oceana's results (despite the rand strength) vindicated the fund manager's confidence in the company's business dynamics: fish is a scarce global commodity and the increased demand emanating from a rapidly growing Chinese middle class will continue to provide upside surprises in the price of fish.

Netcare continues to outwit its cynics by finding new ways of enlarging its customer base despite a rigid regulatory framework. There is a successful joint venture with the NHS in the UK, as well as innovative lower-cost health alternatives for a large part of the local market who are formally employed but without health insurance.

Mustek, the 'proudly South African' local personal computer assembler, demonstrated its skills in procurement of cheaper components and its ability to raise margins in a strengthening rand through an excellent set of results. The company's valuation still remains compelling despite a sharp rise in the share price.

The fund has maintained an underweight position in gold because, quite simply, the gold price defies rational analysis. There is an intrinsic unpredictability to central bank gold selling and this renders any supply/demand analysis an exercise in futility. To add to boot, the funds gold shares remain very expensive on valuation criteria.

The fund manager's remain confident on the prospects of the funds mid/small cap universe. These companies have repeatedly shown they are better positioned to deal with a turbulent world, not least a volatile currency. The overall market has been thrown into turmoil with the spectacular recovery in the rand.

The world outlook continues to be plagued by sub-par prospects for the world's major economies. This combination creates a formidable headwind for the resource-rich ALSI 40. Conversely, the mid/small cap sector is in a far better position to eke out further market share gains and hence insulate itself from the global malaise. Flexibility remains the key, and small caps have that in spades.

Coronation's Specialist Growth fund surpassed its benchmark during the quarter but lags behind many of its competitors. It has betted heavily in the leisure, computer hardware and retailing sectors and has a small exposure to resources. Fund manager Sunil Shah is confident that Oceana, Netcare and Mustek are safe bets.

(Financial Mail - 31 October 2003)

One of the striking features of the current quarter has been the stellar performance of retail shares. The sceptics highlighted the effects of rising interest rates and declining job growth prospects resulting from the stronger rand. However, the dramatic reduction in consumer debt levels over the last two years has left the household balance sheet in a far healthier position to weather the current storm. Hence the surprising sales growth of the retailers who focus on consumer discretionary spending.

The fund's performance was mediocre during the quarter due to its underexposure to retail, although a position in Edgars has done very well. The fund manager's approach has been to focus on the textile manufacturers. After all, what's sold has to be produced, right? Seardel is the largest textile and apparel manufacturer in the country. There has recently been a turnaround in the producers' fortunes, partly because of their consolidation (a number have gone belly-up or have been acquired) and partly due to the African Growth and Opportunity Act, which allows selected companies to export duty-free into the US. This has transformed Seardel's bargaining position with the local retailers as there is now a viable alternative for their products in the form of US Sears or JC Penney. The fund manager's are confident that the fund's 9% position in Seardel will be handsomely rewarded in the near term.

During the last three months, the fund manager's have significantly reduced the funds exposure to resource companies. The earnings challenge for companies, which now receive 30% less rands per unit of output (given the stronger rand) is a formidable one, especially when one considers the escalation in their cost base. Northam, a long-standing favourite in the fund, has served its purpose for the moment. The exposure to Energy Africa was also reduced, although its intrinsic value still demonstrates further upside.

The overall market has been thrown into turmoil with the spectacular recovery in the rand. The world outlook continues to be plagued by anaemic prospects for three of the world's major economies. This, coupled with a surging rand, creates a difficult headwind for the resource-rich ALSI 40. Conversely, the mid/small cap sector is in a far better position to eke out further market share gains and hence insulate itself from the global malaise. At the end of the day, it is valuations which provide the ultimate safety net. The fund manager's continue to be positive on the relative prospects of the mid/small cap sector versus their larger brethren.

Has the market finally acknowledged the intrinsic value of small caps? After handsomely outperforming the index last year, the small cap universe has weathered the recent storm far better than the 16% drop in the All-Share universe for the first quarter. The fund fared far more resiliently, falling by 11% during the same period.

The fund manager's basic premise remains constant: there is significant value to be unlocked in this part of the universe. Focused business models, incentivised management, and a singular drive to attack a particular niche, small caps remain far better poised to endure the lacklustre economy in which we find ourselves. Now that we have a synchronised downturn in three of the world's major economies, fund managers must be far less inclined to chase the resource-rich ALSI 40, especially when one factors in the recent rand strength. One must note that a small cap establishing an export niche (example: Bell equipment selling articulated dump trucks into Europe and gaining substantial market share from a small base) is much better placed than an Anglos which is obviously hostage to the global downturn.

The fund manager's have seen a gradual revival in the interest in small caps from the large institutions. Given the illiquidity of this market, a slight shift in institutional focus would cause a dramatic bounce. Will the outperforming era for small caps continue? The fund manager's certainly think so, due to a combination of valuation and earnings criteria. Local is lekker, at least for this year. Hold on to your focused small cap winners.

Market imperfections do not last forever. It is reassuring to note the small cap rally that was anticipated has materialised handsomely over 2002. The fund registered an annual return of 24.03%, versus the All Share index return of 16.86%.

The fund manager's maintain that that the neglect suffered by this sector will continue to be addressed over the coming year. Niche companies with focused managements are posting superior earnings growth in a highly turbulent macro economic environment. It is simply a question of size that enables a small company to react with far greater agility than their larger brethren.

It is only a matter of time until fund managers wake up to the propositions on offer. Given the illiquidity of this market, a slight shift in institutional focus would cause a dramatic bounce. Now that we have a synchronised downturn in three of the world's major economies coupled with a surging rand, fund managers must be far less inclined to chase the resource-rich ALSI 40, especially when one factors in the uncertainty created by the Mining Charter. This will favour the domestic small and mid cap sectors.

A significant new position has been built in Seardel. The company has stealthily acquired an impressive portfolio of textile factories. The recent African Growth pact signed with America allows SA duty-free access into the world's most lucrative consumer market. This will transform the fortunes of South Africa's competitive textile manufacturers who have hitherto been under the thumb of the large domestic retailers.

Despite the stronger currency, the fund manager's believe in the intrinsic potential of SA tourism. Judging by the flocks of tourists around the Western Cape, they feel their confidence is being vindicated! Tourvest remains the funds largest core holding.

A position in Oceana was also initiated. The company boasts an incredibly reliable earnings profile despite the cyclicality of the underlying industry. A new dimension to the fishing industry is the growth activity in China. When 1.3bn people with a healthy appetite for seafood see a rise in their consumption, this must alter fish prices at the margin, given the inelasticity of supply. Will Oceana be the catch of 2003?